UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-K/A
                                 Amendment No. 1


(Mark One)

           [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to



                         Commission file number 0-19140

                            CNL INCOME FUND VII, LTD.
             (Exact name of registrant as specified in its charter)

                   Florida                            59-2963871
       (State or other jurisdiction of      (I.R.S. Employer Identification No.)
            incorporation or organization)

                        400 East South Street, Suite 500
                             Orlando, Florida 32801
          (Address of principal executive offices, including zip code)

        Registrant's telephone number, including area code: (407)422-1574

           Securities registered pursuant to Section 12(b) of the Act:

              Title of each class:        Name of exchange on which registered:
                      None                           Not Applicable

           Securities registered pursuant to Section 12(g) of the Act:

               Units of limited partnership interest ($1 per Unit)
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the preceding 12 months (or such shorter  period that the registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days: Yes X No


         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [x]

         Aggregate market value of the voting stock held by nonaffiliates of the
registrant:   The  registrant   registered  an  offering  of  units  of  limited
partnership  interest  (the  "Units") on Form S-11 under the  Securities  Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $1 per Unit.

                    DOCUMENTS INCORPORATED BY REFERENCE:
                                      None


<PAGE>



         The Form 10-K of CNL Income Fund VII, Ltd. for the year ended  December
31,  1997 is being  amended  to  provide  additional  disclosure  under  Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial  Condition and Results of Operations - Capital  Resources,  Short-Term
Liquidity and Long-Term Liquidity.

                                     PART I

Item 1.  Business

         CNL Income Fund VII, Ltd. (the "Registrant" or the  "Partnership") is a
limited  partnership  which was  organized  pursuant to the laws of the State of
Florida on August 18, 1989. The general  partners of the  Partnership are Robert
A.  Bourne,  James  M.  Seneff,  Jr.  and  CNL  Realty  Corporation,  a  Florida
corporation  (the  "General  Partners").  Beginning  on January  30,  1990,  the
Partnership offered for sale up to $30,000,000 of limited partnership  interests
(the "Units")  (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement  on Form S-11  under  the  Securities  Act of 1933,  as  amended.  The
offering  terminated  on August 1, 1990,  as of which date the maximum  offering
proceeds of  $30,000,000  had been received from  investors who were admitted to
the Partnership as limited partners (the "Limited Partners").

         The  Partnership  was organized to acquire both newly  constructed  and
existing  restaurant  properties,  as well as properties upon which  restaurants
were to be  constructed  (the  "Properties"),  which  are  leased  primarily  to
operators of national and regional fast-food and family-style  restaurant chains
(the "Restaurant Chains").  Net proceeds to the Partnership from its offering of
Units,  after  deduction  of  organizational  and  offering  expenses,  totalled
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties  owned by joint  ventures in which the  Partnership is a co-venturer,
and to establish a working  capital  reserve for  Partnership  purposes.  During
1994, the Partnership sold its Property in St. Paul,  Minnesota,  and reinvested
the majority of the net sales proceeds in a Checkers Property in Winter Springs,
Florida,  consisting  of only  land,  and a Jack in the Box  Property  in  Yuma,
Arizona,  which is owned as  tenants-in-common  with an affiliate of the General
Partners.  The lessee of the Property  consisting of only land owns the building
currently on the land.  During 1995,  the  Partnership  sold its  Properties  in
Florence,  South Carolina,  and Jacksonville,  Florida,  and accepted promissory
notes  in the  principal  sum  of  $1,160,000  and  $240,000,  respectively.  In
addition,  the building located on the Partnership's  Property in Daytona Beach,
Florida, was demolished in accordance with a condemnation agreement during 1995.
During the year ended December 31, 1996, the Partnership  sold its Properties in
Hartland, Michigan, and Colorado Springs, Colorado, and reinvested the net sales
received from the sale of the Colorado  Springs,  Colorado  Property in a Boston
Market Property in Marietta,  Georgia.  During the year ended December 31, 1997,
the  Partnership  used the net sales  proceeds  from the sale of the Property in
Hartland, Michigan, to invest in CNL Mansfield Joint

                                        1

<PAGE>




Venture with an  affiliate of the General  Partners in exchange for a 79 percent
interest in the joint venture.  In addition,  during 1997, the Partnership  sold
its  Properties  in  Columbus,  Indiana  and  Dunnellon,  Florida,  and sold the
Property  in  Yuma,  Arizona,  which  was  owned  as  tenants-in-common  with an
affiliate of the General  Partners,  and  reinvested the net sales proceeds in a
Property in Smithfield,  North Carolina,  and a Property in Miami, Florida, each
as tenants in common,  with affiliates of the General  Partners.  As a result of
the above  transactions,  the Partnership owned 40 Properties as of December 31,
1997.  The 40  Properties  include  interests in ten  Properties  owned by joint
ventures in which the Partnership is a co-venturer and two Properties owned with
affiliates as tenants-in-common. The Properties are leased on a triple-net basis
with the lessees  responsible for all repairs and  maintenance,  property taxes,
insurance and utilities.


         The  Partnership  will hold its Properties  until the General  Partners
determine that the sale or other  disposition of the Properties is  advantageous
in view of the Partnership's investment objectives.  In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation,  net cash flow and  federal  income  tax  considerations.  Certain
lessees also have been granted options to purchase Properties,  generally at the
Property's  then fair market  value after a specified  portion of the lease term
has elapsed.  In general,  the General Partners plan to seek the sale of some of
the  Properties  commencing  seven  to 12 years  after  their  acquisition.  The
Partnership  has no  obligation  to sell all or any portion of a Property at any
particular  time,  except as may be required  under  property  purchase  options
granted to certain lessees.

                                        2

<PAGE>



Leases

         Although there are variations in the specific terms of the leases,  the
following  is  a  summarized   description  of  the  general  structure  of  the
Partnership's  leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms  ranging  from five to 20 years (the average  being 17 years),  and expire
between  2003 and 2016.  All leases are on a triple-net  basis,  with the lessee
responsible  for all repairs and  maintenance,  property  taxes,  insurance  and
utilities.  The leases of the Properties  provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $22,100 to
$166,700. The majority of the leases provide for percentage rent, based on sales
in excess of a specified amount.  In addition,  some of the leases provide that,
commencing  in specified  lease years  (generally  ranging from the sixth to the
eleventh lease year), the annual base rent required under the terms of the lease
will increase.

         Generally,  the  leases  of the  Properties  provide  for  two to  four
five-year  renewal  options  subject  to the same  terms and  conditions  as the
initial  lease.  Certain  lessees  also have been  granted  options to  purchase
Properties at the Property's then fair market value after a specified portion of
the lease  term has  elapsed.  Under the terms of  certain  leases,  the  option
purchase  price  may equal  the  Partnership's  original  cost to  purchase  the
Property (including  acquisition  costs),  plus a specified  percentage from the
date of the lease or a specified percentage of the Partnership's purchase price,
if that amount is greater than the Property's  fair market value at the time the
purchase option is exercised.

         The leases also  generally  provide that, in the event the  Partnership
wishes to sell the Property  subject to that lease,  the Partnership  first must
offer the  lessee  the right to  purchase  that  Property  on the same terms and
conditions,  and for the same  price,  as any offer  which the  Partnership  has
received for the sale of the Property.

         In February  1997,  the  Partnership  reinvested the net sales proceeds
from the sale of the  Property in Hartland,  Michigan,  in CNL  Mansfield  Joint
Venture, as described below under "Joint Venture  Arrangements." The lease terms
of the lease of CNL Mansfield Joint Venture are  substantially the same as those
described in the first three paragraphs of this section.

         In December  1997,  the  Partnership  reinvested the net sales proceeds
from the sale of the Property in Dunnellon,  Florida and Columbus,  Indiana, and
net sales  proceeds  from the sale of the  Property  in Yuma,  Arizona,  held as
tenants-in-common  with an affiliate of the General  Partners,  in a Property in
Miami,  Florida, as  tenants-in-common  with affiliates of the General Partners,
and in a Property in Smithfield,  North Carolina,  as tenants-in-common  with an
affiliate  of the  General  Partners,  as  described  below  in  "Joint  Venture
Arrangements."  The lease terms for these Properties are  substantially the same
as the

                                        3

<PAGE>



Partnership's  other leases, as described above in the first three paragraphs of
this section.

Major Tenants


         During 1997,  three  lessees of the  Partnership  and its  consolidated
joint venture,  Golden Corral Corporation,  Restaurant Management Services, Inc.
and Flagstar  Enterprises,  Inc., each  contributed more than ten percent of the
Partnership's   total  rental   income   (including   rental   income  from  the
Partnership's  consolidated joint venture and the Partnership's  share of rental
income from nine  Properties  owned by  unconsolidated  joint ventures and three
Properties  owned with affiliates as  tenants-in-common,  including one Property
owned as  tenants-in-common  which was sold in October 1997). As of December 31,
1997,  Golden Corral  Corporation  was the lessee under leases  relating to four
restaurants,  Restaurant  Management Services,  Inc. was the lessee under leases
relating to seven restaurants and one site currently consisting of land only and
Flagstar  Enterprises,  Inc.  was  the  lessee  under  leases  relating  to four
restaurants.  It is  anticipated  that,  based on the  minimum  rental  payments
required by the leases,  these three  lessees each will  continue to  contribute
more than ten  percent  of the  Partnership's  total  rental  income in 1998 and
subsequent  years. In addition,  three Restaurant  Chains,  Golden Corral Family
Steakhouse  Restaurants  ("Golden  Corral"),  Hardee's  and  Burger  King,  each
accounted for more than ten percent of the Partnership's  total rental income in
1997 (including rental income from the Partnership's  consolidated joint venture
and the  Partnership's  share of rental  income  from nine  Properties  owned by
unconsolidated  joint  ventures and three  Properties  owned with  affiliates as
tenants-in-common,  including one Property owned as tenants-in-common  which was
sold in October 1997). In subsequent  years, it is anticipated  that these three
Restaurant Chains each will continue to account for more than ten percent of the
Partnership's total rental income to which the Partnership is entitled under the
terms of the leases.  Any failure of these  lessees or  Restaurant  Chains could
materially  affect the  Partnership's  income.  As of December 31, 1997,  Golden
Corral  Corporation leased Properties with an aggregate carrying value in excess
of 20 percent of the total assets of the Partnership.


Joint Venture Arrangements and Tenancy in Common Arrangements


         The  Partnership  has entered  into a joint  venture  arrangement,  San
Antonio #849 Joint Venture, with an unaffiliated entity to purchase and hold one
Property.  In addition,  the  Partnership  has entered into four separate  joint
venture  arrangements:  Halls Joint  Venture  with CNL Income  Fund V, Ltd.,  an
affiliate  of the General  Partners,  to  purchase  and hold one  Property;  CNL
Restaurant  Investments  II with CNL Income Fund VIII,  Ltd. and CNL Income Fund
IX,  Ltd.,  affiliates  of the  General  Partners,  to  purchase  and  hold  six
Properties;  Des Moines Real Estate Joint  Venture with CNL Income Fund XI, Ltd.
and CNL Income Fund XII, Ltd.,  affiliates of the General Partners,  to purchase
and hold one  Property;  and CNL  Mansfield  Joint  Venture with CNL Income Fund
XVII, Ltd., an affiliate of


                                        4

<PAGE>



the General  Partners to purchase  and hold one  Property.  The  affiliates  are
limited partnerships organized pursuant to the laws of the State of Florida. The
joint venture  arrangements  provide for the  Partnership  and its joint venture
partners to share in all costs and benefits associated with the joint venture in
accordance with their respective  percentage interests in the joint venture. The
Partnership has an 83 percent  interest in San Antonio #849 Joint Venture,  a 51
percent  interest  in  Halls  Joint  Venture,  an 18  percent  interest  in  CNL
Restaurant  Investments  II, a 4.79%  interest in Des Moines  Real Estate  Joint
Venture,  and  a 79  percent  interest  in  CNL  Mansfield  Joint  Venture.  The
Partnership and its joint venture partners are also jointly and severally liable
for all debts, obligations and other liabilities of the joint venture.

         San Antonio #849 Joint Venture,  Halls Joint  Venture,  Des Moines Real
Estate Joint Venture and CNL  Mansfield  Joint Venture each have an initial term
of 20 years and, after the expiration of the initial term, continue in existence
from year to year unless terminated at the option of any joint venturer or by an
event of dissolution.  Events of dissolution include the bankruptcy,  insolvency
or  termination of any joint  venturer,  sale of the Property owned by the joint
venture and mutual  agreement of the  Partnership and each joint venture partner
to dissolve the joint  venture.  CNL Restaurant  Investments  II's joint venture
agreement  does not provide a fixed  term,  but  continues  in  existence  until
terminated by any of the joint venturers.

         The  Partnership  has management  control of the San Antonio #849 Joint
Venture and shares  management  control  equally with  affiliates of the General
Partners for Halls Joint Venture, CNL Restaurant Investments II, Des Moines Real
Estate  Joint  Venture  and CNL  Mansfield  Joint  Venture.  The  joint  venture
agreements  restrict  each  venturer's  ability to sell,  transfer or assign its
joint venture  interest  without first offering it for sale to its joint venture
partner,  either upon such terms and  conditions  as to which the  venturers may
agree or,  in the  event  the  venturers  cannot  agree,  on the same  terms and
conditions  as any offer  from a third  party to  purchase  such  joint  venture
interest.

         Net cash flow from operations of San Antonio #849 Joint Venture,  Halls
Joint  Venture,  CNL  Restaurant  Investments  II, Des Moines Real Estate  Joint
Venture and CNL Mansfield  Joint Venture is distributed 83 percent,  51 percent,
18  percent,  4.79% and 79 percent,  respectively,  to the  Partnership  and the
balance is distributed to each of the other joint venture partners in accordance
with their respective percentage interests in the joint venture. Any liquidation
proceeds,  after paying joint venture debts and liabilities and funding reserves
for  contingent  liabilities,  will be  distributed  first to the joint  venture
partners with positive  capital account  balances in proportion to such balances
until such  balances  equal zero,  and  thereafter  in  proportion to each joint
venture partner's percentage interest in the joint venture.

         In addition to the above joint venture  agreements,  in July 1994,  the
Partnership entered into an agreement to hold a Jack in

                                        5

<PAGE>




the Box  Property  as  tenants  in common  with CNL  Income  Fund VI,  Ltd.,  an
affiliate of the General  Partners.  The agreement  provided for the Partnership
and the  affiliate  to  share in the  profits  and  losses  of the  Property  in
proportion to each  co-venturer's  percentage.  The  Partnership  owned a 48.33%
interest in this Property.  In October 1997, the  Partnership and the affiliate,
as tenants in common,  sold the Jack in the Box  Property in Yuma,  Arizona.  In
December 1997, the  Partnership  entered into an agreement to hold a Property in
Miami,  Florida, as tenants in common with CNL Income Fund III, Ltd., CNL Income
Fund X, Ltd. and CNL Income Fund XIII, Ltd., affiliates of the General Partners,
and in conjunction  therewith,  reinvested its portion of the net sales proceeds
received from the sale of the Property in Yuma,  Arizona,  along with additional
funds from the sale of the Property in Columbus, Indiana. The agreement provides
for the  Partnership and the affiliate to share in the profits and losses of the
Property  in  proportion  to  each  co-venturer's   percentage   interest.   The
Partnership owns a 35.64% interest in the Property in Miami, Florida.

         In  addition,  in  December  1997,  the  Partnership  entered  into  an
agreement to hold a Golden Corral  Property in Smithfield,  North  Carolina,  as
tenants in common with CNL Income Fund II,  Ltd.,  an  affiliate  of the General
Partners.  The agreement provides for the Partnership and the affiliate to share
in the profits and losses of the Property in  proportion  to each  co-venturer's
percentage  interest.  The  Partnership  owns  a 53  percent  interest  in  this
Property.


         Each of the affiliates is a limited  partnership  organized pursuant to
the laws of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer,  or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.

         The use of joint venture and tenancy in common  arrangements allows the
Partnership  to fully invest its available  funds at times at which it would not
have  sufficient  funds to purchase an additional  property,  or at times when a
suitable  opportunity to purchase an additional  property is not available.  The
use of joint  venture  and  tenancy in common  arrangements  also  provides  the
Partnership  with  increased  diversification  of its portfolio  among a greater
number of properties. In addition,  tenancy in common arrangements may allow the
Partnership  to defer the gain for federal  income tax purposes upon the sale of
the property if the proceeds  are  reinvested  in an  additional  property.  The
affiliates are limited partnerships  organized pursuant to the laws of the State
of Florida.


Certain Management Services

         CNL Income Fund Advisors,  Inc., an affiliate of the General  Partners,
provided  certain  services  relating to management of the  Partnership  and its
Properties  pursuant to a  management  agreement  with the  Partnership  through
September 30, 1995.  Under this  agreement,  CNL Income Fund Advisors,  Inc. was
responsible for

                                        6

<PAGE>



collecting rental payments, inspecting the Properties and the tenants' books and
records, assisting the Partnership in responding to tenant inquiries and notices
and providing  information to the Partnership about the status of the leases and
the  Properties.  CNL Income  Fund  Advisors,  Inc.  also  assisted  the General
Partners in negotiating  the leases.  For these  services,  the  Partnership had
agreed to pay CNL Income Fund Advisors, Inc. an annual fee of one percent of the
sum of gross rental  revenues from  Properties  wholly owned by the  Partnership
plus the  Partnership's  allocable  share of gross revenues of joint ventures in
which   the   Partnership   is  a   co-venturer   and  the   Property   held  as
tenants-in-common  with an affiliate,  but not in excess of competitive fees for
comparable  services.  Under the  management  agreement,  the  management fee is
subordinated  to receipt by the Limited  Partners of an aggregate,  ten percent,
cumulative,  noncompounded annual return on their adjusted capital contributions
(the "10% Preferred  Return"),  calculated in accordance with the  Partnership's
limited partnership agreement (the "Partnership Agreement").

         Effective October 1, 1995, CNL Income Fund Advisors,  Inc. assigned its
rights  in,  and its  obligations  under,  the  management  agreement  with  the
Partnership  to CNL Fund  Advisors,  Inc. All of the terms and conditions of the
management agreement,  including the payment of fees, as described above, remain
unchanged.

         The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.


Employees

         The  Partnership   has  no  employees.   The  officers  of  CNL  Realty
Corporation  and the officers and employees of CNL Fund Advisors,  Inc.  perform
certain  services for the  Partnership.  In addition,  the General Partners have
available to them the  resources  and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates,  who may
also perform certain services for the Partnership.


Item 2.  Properties


         As of December 31, 1997, the Partnership owned 40 Properties. Of the 40
Properties, 28 are owned by the Partnership in fee simple, ten are owned through
joint  venture  arrangements  and two are  owned  through  a  tenancy  in common
arrangement.  See  Item 1.  Business  - Joint  Venture  and  Tenancy  in  Common
Arrangements.  The Partnership is not permitted to encumber its Properties under
the terms of its  partnership  agreement.  Reference  is made to the Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the Properties and their respective costs, including acquisition


                                        7

<PAGE>



fees and certain acquisition expenses.

Description of Properties

         Land. The Partnership's  Property sites range from approximately 10,800
to 110,200  square  feet  depending  upon  building  size and local  demographic
factors.  Sites  purchased  by  the  Partnership  are  in  locations  zoned  for
commercial use which have been reviewed for traffic patterns and volume.

         The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information  regarding the location of
the  Properties  is  contained  in the  Schedule of Real Estate and  Accumulated
Depreciation filed with this report.

         State                                  Number of Properties

         Arizona                                         1
         Colorado                                        1
         Florida                                        10
         Georgia                                         2
         Indiana                                         1
         Louisiana                                       1
         Michigan                                        2
         Minnesota                                       1
         North Carolina                                  1
         Ohio                                            7
         Tennessee                                       4
         Texas                                           8
         Washington                                      1
                                                    ------
         TOTAL PROPERTIES:                              40
                                                    ======

         Buildings.  Generally,  each of the Properties owned by the Partnership
includes  a  building  that is one of a  Restaurant  Chain's  approved  designs.
However,  the building located on the Checkers  Property is owned by the tenant,
while the land parcel is owned by the Partnership.  As of December 31, 1997, the
Partnership had no plans for renovation of the Properties.  Depreciation expense
is computed for buildings and improvements  using the straight line method using
a depreciable  life of 40 years for federal income tax purposes.  As of December
31, 1997, the aggregate cost basis of the  Properties  owned by the  Partnership
and  joint  ventures  (including  Properties  held  through  tenancy  in  common
arrangements)  for federal income tax purposes was $21,303,689 and  $10,187,585,
respectively.



                                        8

<PAGE>



         The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.

         Restaurant Chain            Number of Properties

         Boston Market                         1
         Burger King                          10
         Checkers                              1
         Chevy's Fresh Mex                     1
         Church's                              2
         Golden Corral                         5
         Hardee's                              6
         Jack in the Box                       3
         KFC                                   2
         Popeyes                               5
         Rally's                               1
         Shoney's                              2
         Taco Bell                             1
                                          ------
         TOTAL PROPERTIES                     40
                                          ======

         The General Partners consider the Properties to be well-maintained
and sufficient for the Partnership's operations.

         The General  Partners  believe that the  Properties are adequately
covered by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership.  This insurance is intended
to reduce the Partnership's  exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.

         In addition,  the  building  located on the  Partnership's  Property in
Daytona  Beach,  Florida,  was  demolished  in  accordance  with a  condemnation
agreement  during  1995.  The  buildings   generally  are  rectangular  and  are
constructed from various  combinations of stucco,  steel,  wood, brick and tile.
The sizes of the buildings owned by the Partnership range from approximately 700
to 10,600  square  feet.  All  buildings  on  Properties  are  freestanding  and
surrounded by paved  parking  areas.  Buildings  are suitable for  conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations.

         Leases.  The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term  "triple  net"  basis,  meaning  that the  tenant is  responsible  for
repairs,  maintenance,  property taxes,  utilities and insurance.  Generally,  a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably  necessary to refurbish  buildings,  premises,
signs  and  equipment  so  as  to  comply  with  the  lessee's  obligations,  if
applicable,  under the  franchise  agreement  to reflect the current  commercial
image of its Restaurant  Chain.  These capital  expenditures  are required to be
paid by the lessee during the term of the lease.  The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.

         At December 31, 1997,  1996, 1995, 1994, and 1993 all of the Properties
were  occupied.  The following is a schedule of the average annual rent for each
of the five years ended December 31:
<TABLE>
<CAPTION>

                                                        For the Year Ended December 31:
                                   1997            1996              1995             1994               199
                              -----------        -----------      -----------     ------------      -----------
<S> <C>
    Rental Revenues (1)        $2,751,418        $2,850,721       $2,699,624        $2,939,995      $2,984,072
    Properties                         40                40               41                43              42
    Average Rent per Unit         $68,785           $71,268          $65,844           $68,372         $71,049

</TABLE>

                                                        11

<PAGE>



(1)      Rental revenues include the Partnership's share of rental revenues from
         the ten Properties owned through joint venture arrangements and the two
         properties  owned  through  tenancy  in  common  arrangements.   Rental
         revenues have been adjusted,  as applicable,  for any amounts for which
         the Partnership has established an allowance for doubtful accounts.

         The following is a schedule of lease expirations for leases in place as
of  December  31,  1997  for  each of the ten  years  beginning  with  1998  and
thereafter.
<TABLE>
<CAPTION>

                                                                                            Percentage of
                                            Number              Annual Rental                Gross Annual
        Expiration Year                 of Leases                  Revenues                  Rental Income
<S> <C>

             1998                              1                     30,000                        1.10%
             1999                              -                          -                            -
             2000                              -                          -                            -
             2001                              -                          -                            -
             2002                              -                          -                            -
             2003                              1                    107,991                        3.98%
             2004                              2                    179,231                        6.60%
             2005                              9                    571,939                       21.06%
             2006                              1                     62,086                        2.29%
             2007                              -                          -                            -
             Thereafter                       26                  1,764,587                       64.97%
                                        --------              -------------                -------------
             Totals                           40                  2,715,834                      100.00%
                                        ========              =============                =============
</TABLE>

      Leases  with  Major  Tenants.  The  terms of each of the  leases  with the
Partnership's  major  tenants as of December  31,  1997 (see Item 1.  Business -
Major  Tenants),  are  substantially  the  same as  those  described  in Item 1.
Business - Leases.

      Golden  Corral  Corporation  leases four Golden  Corral  restaurants.  The
initial term of each lease is 15 years (expiring  between 2004 and 2005) and the
average  minimum  base  annual  rent is  approximately  $147,800  (ranging  from
approximately $137,100 to $166,700).

      Restaurant Management Services, Inc. leases five Popeyes restaurants,  one
Shoney's  restaurant,  one  Church's  Fried  Chicken  restaurant  and  one  site
currently  consisting  of land  only  (formerly  operated  as a  Church's  Fried
Chicken).  The initial  term of each lease is 19 to 20 years  (expiring  between
2009 and 2010) and the average minimum base annual rent is approximately $53,700
(ranging from approximately $22,100 to $121,000).

      Flagstar Enterprises,  Inc. leases four Hardee's restaurants.  The initial
term of each lease is 20 years (expiring  between 2010 and 2012) and the average
minimum base annual rent is approximately  $79,100  (ranging from  approximately
$70,500 to $89,400).


                                                        12

<PAGE>






 Competition

      The fast-food and family-style  restaurant  business is characterized
by intense competition.  The restaurants on the Partnership's Properties compete
with  independently  owned  restaurants,  restaurants which are part of local or
regional chains, and restaurants in other well-known national chains,  including
those offering different types of food and service.

         At the time the Partnership elects to dispose of its Properties,  other
than as a result of the exercise of tenant options to purchase  Properties,  the
Partnership  will be in  competition  with other  persons and entities to locate
purchasers for its Properties.

                                                        13

<PAGE>



                                     PART II



Item 7.   Management's Discussion and Analysis of Financial
Condition and Results of Operations

      The  Partnership  was  organized on August 18, 1989,  to acquire for cash,
either directly or through joint venture  arrangements,  both newly  constructed
and  existing  restaurant  Properties,  as well as land  upon  which  restaurant
Properties  were to be constructed,  which are leased  primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are triple-net  leases,  with the lessees  generally  responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1997, the  Partnership  owned 40 Properties,  either  directly or indirectly
through joint venture or tenancy in common arrangements.


 Capital Resources


      The  Partnership's  primary source of capital for the years ended December
31, 1997, 1996 and 1995, was cash from operations  (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid  for  expenses).  Cash  from  operations  was  $2,840,459,  $2,670,869  and
$2,484,538 for the years ended December 31, 1997,  1996 and 1995,  respectively.
The increase in cash from  operations  during 1997 and 1996, each as compared to
the prior  year,  is  primarily  a result of changes in income and  expenses  as
described  in "Results  of  Operations"  below and changes in the  Partnership's
working capital during each of the respective years.

      Other sources and uses of capital  included the following during the years
ended December 31, 1997, 1996 and 1995.

      In August 1995,  the  Partnership  sold its  Property in  Florence,  South
Carolina, to the tenant for $1,160,000, and in connection therewith,  accepted a
promissory note in the principal sum of $1,160,000, collateralized by a mortgage
on the  Property.  The note bears  interest at a rate of 10.25% per annum and is
being  collected in 59 equal  monthly  installments  of $10,395,  with a balloon
payment of $1,106,657 due in July 2000.  Collections  commenced August 10, 1995.
In  accordance  with  Statement  of  Financial   Accounting  Standards  No.  66,
"Accounting for Sales of Real Estate," the Partnership  recorded the sale of the
Property using the installment sales method.  Therefore, the gain on the sale of
the Property was deferred and is being recognized as income  proportionately  as
payments under the mortgage note are  collected.  The  Partnership  recognized a
gain of $926 and $836 for  financial  reporting  purposes  for the  years  ended
December 31, 1997 and 1996, respectively,  and had a deferred gain in the amount
of  $126,303  and  $127,229 at December  31,  1997 and 1996,  respectively.  The
mortgage  notes  receivable  balances  at December  31,  1997 and 1996,  include
principal of $1,131,496 and $1,139,788,  respectively,  and accrued  interest of
$6,235 and

                                                        14

<PAGE>




$6,281,  respectively,  and are shown net of the  deferred  gain of $126,303 and
$127,229, respectively. Proceeds received from the sale of this Property will be
reinvested in additional Properties or used to pay Partnership liabilities.

      In November 1994, the  Partnership  received  notice from the subtenant of
its Property in Jacksonville,  Florida,  that it intended to exercise its option
to purchase the Property in accordance with the terms of its sublease agreement.
In December 1995, the Partnership sold its Property in Jacksonville, Florida, to
the subtenant for $240,000,  and in connection therewith,  accepted a promissory
note in the  principal  sum of  $240,000,  collateralized  by a mortgage  on the
Property.  The note bears  interest  at a rate of ten  percent  per annum and is
being  collected in 119 equal  monthly  installments  of $2,106,  with a balloon
payment of $218,252 due December 2005. Collections commenced in January 1996. As
a result  of the sale of the  Property,  the  Partnership  recognized  a loss of
$6,556 for financial  reporting  purposes for the year ended  December 31, 1995.
The mortgage  notes  receivable  balance at December 31, 1997 and 1996,  include
principal of $237,192 and $238,666, respectively, and accrued interest of $1,977
and $1,989, respectively.  Proceeds received from the sale of this Property will
be  distributed  to the  Limited  Partners  or will  be used to pay  Partnership
liabilities.


      In March 1996, the  Partnership  entered into an agreement with the tenant
of the Property in Daytona Beach, Florida, for payment of certain rental payment
deferrals  the  Partnership  had granted to the tenant  through  March 31, 1996.
Under the agreement,  the Partnership agreed to abate  approximately  $13,200 of
the rental payment deferral  amounts.  The tenant made payments of approximately
$5,700 in each of April 1996 and March 1997 in accordance  with the terms of the
agreement,  and has agreed to pay the Partnership  the remaining  balance due of
approximately $28,000 in five remaining annual installments through 2002.


      In July 1996,  the  Partnership  sold its  Property in  Colorado  Springs,
Colorado,  for  $1,075,000,  and  received  net sales  proceeds  of  $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes.  This Property
was  originally  acquired  by the  Partnership  in July  1990  and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous acquisition
expenses;  therefore,  the  Partnership  sold  the  Property  for  approximately
$144,000  in excess  of its  original  purchase  price.  In  October  1996,  the
Partnership reinvested the net sales proceeds, along with additional funds, in a
Boston  Market  Property  located  in  Marietta,   Georgia.  A  portion  of  the
transaction relating to the sale of the Property in Colorado Springs,  Colorado,
and the  reinvestment  of the net sales proceeds were structured to qualify as a
like-kind  exchange  transaction in accordance with Section 1031 of the Internal
Revenue  Code.  The  Partnership  distributed  amounts  sufficient to enable the
Limited Partners to pay federal and state income taxes resulting from the sale.


      In addition, in October 1996, the Partnership sold its

                                                        15

<PAGE>



Property in Hartland,  Michigan, for $625,000 and received net sales proceeds of
$617,035, resulting in a loss of approximately $235,465, for financial reporting
purposes. In February 1997, the Partnership reinvested the net sales proceeds in
CNL Mansfield Joint Venture.  The  Partnership has a 79 percent  interest in the
profits and losses of CNL Mansfield Joint Venture and the remaining  interest in
this joint venture is held by an affiliate of the Partnership which has the same
General Partners.


      In May 1997, the Partnership sold its Property in Columbus,  Indiana,  for
$240,000  and received  net sales  proceeds of $223,589,  resulting in a loss of
$19,739 for financial  reporting  purposes.  In December 1997,  the  Partnership
reinvested the net sales proceeds, along with additional funds, in a Property in
Miami, Florida, as tenants-in-common  with affiliates of the General Partner, in
exchange for a 35.64% interest in this Property.

      In October 1997, the Partnership sold its Property in Dunnellon,  Florida,
for $800,000 and received  net sales  proceeds  (net of $5,055 which  represents
amounts due to the former tenant for prepaid  rent) of $752,745,  resulting in a
gain of $183,701 for financial reporting purposes.  This Property was originally
acquired  by the  Partnership  in  August  1990 and had a cost of  approximately
$546,300,  excluding  acquisition fees and miscellaneous  acquisition  expenses;
therefore,  the  Partnership  sold the  Property for  approximately  $211,500 in
excess of its  original  purchase  price.  In  December  1997,  the  Partnership
reinvested these net sales proceeds in a Property in Smithfield, North Carolina,
as  tenants-in-common  with an  affiliate  of the General  Partner.  The General
Partners  believe that the transaction,  or a portion  thereof,  relating to the
sale of the Property in Dunnellon, Florida and the reinvestment of the net sales
proceeds in the  Property  in  Smithfield,  North  Carolina,  will  qualify as a
like-kind  exchange  transaction in accordance with Section 1031 of the Internal
Revenue Code.  However,  the Partnership will distribute  amounts  sufficient to
enable the Limited Partners to pay federal and state income taxes, if any, (at a
level reasonably assumed by the General Partners) resulting from the sale.

      In  addition,  in October  1997,  the  Partnership  and an  affiliate,  as
tenants-in-common,  sold the Property in Yuma, Arizona, in which the Partnership
owned a 48.33% interest,  for a total sales price of $1,010,000 and received net
sales proceeds of $982,025,  resulting in a gain, to the  tenancy-in-common,  of
approximately  $128,400  for  financial  reporting  purposes.  The  Property was
originally acquired in July 1994 and had a total cost of approximately $861,700,
excluding acquisition fees and miscellaneous  acquisition  expenses;  therefore,
the  Property  was sold for  approximately  $120,300  in excess of its  original
purchase price. In December 1997, the Partnership  reinvested its portion of the
net sales  proceeds  from the sale of the Yuma,  Arizona,  Property,  along with
funds from the sale of the  wholly-owned  Property in  Columbus,  Indiana,  in a
Property in Miami, Florida, as tenants-in-common with affiliates of the

                                                        16

<PAGE>



General  Partners.  The General  Partners  believe  that the  transaction,  or a
portion thereof,  relating to the sale of the Property in Yuma,  Arizona and the
reinvestment of the net sales proceeds in the Property in Miami,  Florida,  will
qualify as a like-kind  exchange  transaction in accordance with Section 1031 of
the Internal  Revenue Code.  However,  the Partnership  will distribute  amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
if any, (at a level reasonably  assumed by the General Partners)  resulting from
the sale.

      None of the Properties owned by the Partnership,  or the joint ventures or
the tenancy in common arrangement in which the Partnership owns an interest,  is
or may be  encumbered.  Under its  Partnership  Agreement,  the  Partnership  is
prohibited from borrowing for any purpose;  provided,  however, that the General
Partners or their affiliates are entitled to reimbursement,  at cost, for actual
expenses  incurred by the General  Partners or their affiliates on behalf of the
Partnership.  Affiliates of the General Partners from time to time incur certain
operating  expenses  on behalf  of the  Partnership  for  which the  Partnership
reimburses the affiliates without interest.


      Currently,  rental income from the Partnership's  Properties and net sales
proceeds  from  the  sale of  Properties,  pending  reinvestment  in  additional
Properties or use for the payment of  Partnership  liabilities,  are invested in
money market accounts or other  short-term,  highly liquid  investments  such as
demand deposit accounts at commercial  banks, CDs and money market accounts with
less than a 30-day maturity date, pending the Partnership's use of such funds to
pay Partnership expenses or make distributions to the partners.  At December 31,
1997, the Partnership had $761,317 invested in such short-term  investments,  as
compared to $1,305,429 at December 31, 1996. The decrease in the amount invested
in short-term  investments is primarily a result of the  reinvestment of the net
sales  proceeds  received  in 1996 from the sale of the  Property  in  Hartland,
Michigan,  in CNL Mansfield Joint Venture in February 1997, as described  above.
As of December 31, 1997,  the average  interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was  approximately  two
percent annually. The funds remaining at December 31, 1997, will be used for the
payment of distributions and other liabilities.


Short-Term Liquidity

      The Partnership's  short-term liquidity  requirements consist primarily of
the operating expenses of the Partnership.

      The Partnership's investment strategy of acquiring Properties
for cash and leasing them under triple-net leases to operators
who generally meet specified financial standards minimizes the
Partnership's operating expenses.  The General Partners believe

                                                        17

<PAGE>



that the leases  will  continue  to  generate  cash flow in excess of  operating
expenses.

      Due to low operating  expenses and ongoing cash flow, the General Partners
believe that the  Partnership has sufficient  working  capital  reserves at this
time. In addition,  because all leases of the Partnership's  Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent,  however,  that the
Partnership has insufficient funds for such purposes,  the General Partners will
contribute to the  Partnership  an aggregate  amount of up to one percent of the
offering proceeds for maintenance and repairs.

      The  General  Partners  have the right,  but not the  obligation,  to make
additional capital  contributions if they deem it appropriate in connection with
the operations of the Partnership.

      The Partnership generally distributes cash from operations remaining after
the payment of the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution. Based
primarily  on  current  and  anticipated   future  cash  from  operations,   the
Partnership  declared  distributions  to the Limited  Partners of $2,700,000 for
each of the years ended  December 31, 1997 and 1996, and $2,700,002 for the year
ended December 31, 1995.  This represents  distributions  of $0.090 per Unit for
each of the years ended December 31, 1997, 1996 and 1995. No amounts distributed
to the Limited Partners for the years ended December 31, 1997, 1996 and 1995 are
required to be or have been  treated by the  Partnership  as a return of capital
for  purposes of  calculating  the Limited  Partners'  return on their  adjusted
capital contributions. The Partnership intends to continue to make distributions
of cash available for distribution to the Limited Partners on a quarterly basis.

      During  1997,  1996 and  1995,  affiliates  of the  General  Partners
incurred  on  behalf  of  the   Partnership   $74,968,   $97,288  and   $94,618,
respectively,  for certain operating expenses. As of December 31, 1997 and 1996,
the Partnership  owed $27,683 and $1,867,  respectively,  to affiliates for such
amounts and accounting and administrative services. As of February 28, 1998, the
Partnership had reimbursed the affiliates all such amounts. In addition,  during
the year ended December 31, 1995, the Partnership incurred $7,200 in real estate
disposition  fees due to an affiliate as a result of its services in  connection
with the sale of the Property in Jacksonville, Florida. The payment of such fees
is  deferred  until the  Limited  Partners  have  received  the sum of their 10%
Preferred  Return and their adjusted capital  contributions.  Amounts payable to
other parties,  including distributions payable, of the Partnership increased to
$749,587 at December 31, 1997, from $724,399 at December 31, 1996,  primarily as
a result of an increase in rents paid in advance  during the year ended December
31, 1997.  Liabilities  at December 31, 1997, to the extent they exceed cash and
cash  equivalents  at  December  31,  1997,  will be paid from  future cash from
operations, from amounts collected under the mortgage notes described above

                                                        18

<PAGE>



or,  in the  event  the  General  Partners  elect  to  make  additional  capital
contributions, from future General Partner contributions.


Long-Term Liquidity

      The  Partnership  has no  long-term  debt  or  other  long-term  liquidity
requirements.

Results of Operations

      During 1995, the Partnership  owned and leased 33 wholly owned  Properties
(including  two  Properties  in  Florence,  South  Carolina,  and  Jacksonville,
Florida,  which were sold in August and  December  1995,  respectively),  during
1996, the Partnership owned and leased 33 wholly owned Properties (including two
Properties in Colorado Springs,  Colorado,  and Hartland,  Michigan,  which were
sold in July and October 1996, respectively), during 1997, the Partnership owned
and leased 31 wholly owned  Properties  (including  two  Properties in Columbus,
Indiana  and  Dunnellon,  Florida,  which  were  sold in May and  October  1997,
respectively).  In  addition,  during  1996  and  1995,  the  Partnership  was a
co-venturer  in four  separate  joint  ventures  which  owned  and  leased  nine
Properties and one Property the  Partnership  owned and leased with an affiliate
as  tenants-in-common.  During 1997, the  Partnership  was a co-venturer in five
separate  joint  ventures  which  owned  and  leased  ten  Properties  and three
Properties the Partnership owned with affiliates as tenants-in-common (including
one Property in Yuma,  Arizona which was sold in October  1997).  As of December
31, 1997, the Partnership and its consolidated  joint venture,  San Antonio #849
Joint Venture, owned (either directly, as tenants-in-common with an affiliate or
through joint venture arrangements) 40 wholly owned Properties which are subject
to  long-term,  triple-net  leases.  The leases of the  Properties  provide  for
minimum base annual rental  amounts  (payable in monthly  installments)  ranging
from approximately $22,100 to $166,700.  Substantially all of the leases provide
for percentage rent based on sales in excess of a specified amount. In addition,
some of the  leases  provide  that,  commencing  in the  specified  lease  years
(generally  ranging from the sixth to the eleventh lease year),  the annual base
rent  required  under  the  terms  of  the  lease  will  increase.  For  further
description of the  Partnership's  leases and  Properties,  see Item 1. Business
Leases and Item 2. Properties, respectively.

      During the years ended December 31, 1997,  1996 and 1995, the  Partnership
and its  consolidated  joint  venture,  San Antonio #849 Joint  Venture,  earned
$2,436,222,  $2,459,094  and  $2,427,464,  respectively,  in rental  income from
operating leases and earned income from direct financing leases. The decrease in
rental and earned income during 1997, as compared to 1996, was attributable to a
decrease in rental and earned income as a result of the sales of the  Properties
in Colorado Springs, Colorado; Hartland, Michigan; Columbus, Ohio and Dunnellon,
Florida,  in July 1996,  October 1996, May 1997 and October 1997,  respectively.
This decrease was partially offset by an increase in rental and earned income as
a result of reinvesting the net sales proceeds from the

                                                        19

<PAGE>



sale of the Property in Colorado,  Springs, Colorado, in a Property in Marietta,
Georgia,  in October 1996.  Rental and earned income are expected to decrease in
future  years as a result  of  reinvesting  the  proceeds  from the sales of the
Properties in Hartland, Michigan; Columbus, Ohio and Dunnellon, Florida in joint
ventures and in  Properties  owned with  affiliates,  as  tenants-in-common,  as
described  below.  However,  as a result of reinvesting in joint ventures and in
Properties owned with  affiliates,  as  tenants-in-common,  net income earned by
unconsolidated joint ventures is expected to increase in 1998.

      Rental and earned income  increased during 1996, as compared to 1995, as a
result of recording  rental  income  during 1996  relating to the  Properties in
Colorado Springs, and Pueblo, Colorado as compared to recording no rental income
during  1995 due to  financial  difficulties  the tenant was  experiencing.  The
Property in Colorado  Springs,  Colorado,  was  subsequently  sold, as described
above in "Capital  Resources."  The increase in rental and earned  income during
1996, as compared to 1995,  was partially  offset by a decrease in rental income
during 1996, as a result of the sale of the Partnership  Properties in Florence,
South  Carolina,  and  Jacksonville,  Florida,  in  August  and  December  1995,
respectively.  However, as a result of the Partnership  accepting mortgage notes
for the sale of these  Properties,  interest  income  increased  during 1996 and
1995, as described below and above in "Capital Resources."


      For the years ended December 31, 1997, 1996 and 1995, the Partnership also
earned $51,345, $44,973 and $68,820,  respectively, in contingent rental income.
The increase in  contingent  rental  income during 1997, as compared to 1996, is
primarily a result of  increased  gross sales of certain  restaurant  Properties
requiring the payment of contingent  rental  income.  The decrease in contingent
rental income during 1996, as compared to 1995, is primarily attributable to the
change in the percentage  rent formula in accordance with the terms of the lease
agreement for one of the Partnership's leases during 1996.

      During the years ended December 31, 1997,  1996 and 1995, the  Partnership
earned  $183,579,  $240,079  and  $84,390,  respectively,  in interest and other
income. The decrease in interest and other income for 1997, as compared to 1996,
and the increase in interest and other income  during 1996, as compared to 1995,
is  attributable  to the fact  that  during  1996,  the  Partnership  recognized
approximately  $46,500  in  other  income  due to the fact  that  the  corporate
franchisor of the Properties in Pueblo and Colorado Springs, Colorado, paid past
due real estate taxes relating to the Properties  and the  Partnership  reversed
such amounts during 1996 that it had previously  accrued as payable during 1995.
In addition,  the decrease in interest and other income during 1997, as compared
to  1996,  was  due to  the  fact  that  during  1996,  the  Partnership  earned
approximately  $10,000  in  interest  income on the net sales  proceeds  held in
escrow relating to the Property in Colorado  Springs,  Colorado.  These proceeds
were  reinvested  in a Property  in  Marietta,  Georgia,  in October  1996.  The
increase in interest and other  income  during  1996,  as compared to 1995,  was
primarily  attributable  to an increase in interest earned on the mortgage notes
accepted in connection with

                                                        20

<PAGE>




the sales of the  Properties in Florence,  South  Carolina,  in August 1995, and
Jacksonville,  Florida,  in  December  1995,  as  discussed  above  in  "Capital
Resources."


         For the years ended December 31, 1997,  1996 and 1995, the  Partnership
also earned $267,251, $157,254 and $154,937,  respectively,  attributable to net
income earned by  unconsolidated  joint  ventures in which the  Partnership is a
co-venturer    and   Properties    owned    indirectly    with   affiliates   as
tenants-in-common.  The increase in net income earned by joint  ventures  during
the year ended 1997,  is partially  due to the fact that in February  1997,  the
Partnership  reinvested  the net sales  proceeds it received  from the sale,  in
October 1996,  of the Property in Hartland,  Michigan,  in CNL  Mansfield  Joint
Venture,  with an  affiliate  of the  Partnership  which  has the  same  General
Partners.  In addition,  the increase in net income earned by joint  ventures is
partially  attributable to the fact that in October 1997, the Partnership and an
affiliate,  as  tenants-in-common,  sold the Property in Yuma, Arizona, in which
the Partnership owned a 48.33% interest. The tenancy-in-common recognized a gain
of approximately  $128,400 for financial reporting purposes,  as described above
in "Capital Resources." In addition,  the increase in net income earned by joint
ventures  during the year ended 1997,  as compared to 1996,  is partially due to
the  Partnership  investing  in a Property in  Smithfield,  North  Carolina,  in
December 1997, with affiliates of the General Partners as tenants-in-common,  as
described above in "Capital Resources."


      During at least one of the years ended  December 31, 1997,  1996 and 1995,
three lessees of the  Partnership  and its  consolidated  joint venture,  Golden
Corral  Corporation,   Restaurant   Management   Services,   Inc.  and  Flagstar
Enterprises,  Inc., each contributed more than ten percent of the  Partnership's
total rental income (including rental income from the Partnership's consolidated
joint venture and the Partnership's  share of rental income from nine Properties
owned  by  unconsolidated   joint  ventures  and  three  Properties  owned  with
affiliates   as    tenants-in-common,    including   one   Property   owned   as
tenants-in-common  which sold in October 1997). As of December 31, 1997,  Golden
Corral  Corporation  was the lessee under leases  relating to four  restaurants,
Restaurant  Management  Services,  Inc. was the lessee under leases  relating to
eight  restaurants  and Flagstar  Enterprises,  Inc. was the lessee under leases
relating  to four  restaurants.  It is  anticipated  that,  based on the minimum
rental payments  required by the leases,  these three lessees each will continue
to  contribute  more than ten percent of the  Partnership's  total rental income
during 1998 and subsequent  years. In addition,  during at least one at least on
of the years ended December 31, 1997, 1996 and 1995,  three  Restaurant  Chains,
Golden  Corral,  Hardee's  and Burger  King,  each  accounted  for more than ten
percent of the  Partnership's  total rental income (including rental income from
the  Partnership's  consolidated  joint venture and the  Partnership's  share of
rental income from nine Properties  owned by  unconsolidated  joint ventures and
three  Properties  owned with  affiliates  as  tenants-in-common,  including one
Property  owned  as  tenants-in-common  which  was  sold in  October  1997).  In
subsequent

                                                        21

<PAGE>



years, it is anticipated that these three  Restaurant  Chains each will continue
to account for more than ten percent of the Partnership's total rental income to
which the Partnership is entitled under the terms of the leases.  Any failure of
these lessees or Restaurant  Chains could  materially  affect the  Partnership's
income.


      Operating expenses,  including depreciation and amortization expense, were
$478,614,  $516,056 and $555,134 for the years ended December 31, 1997, 1996 and
1995, respectively.  The decrease in operating expenses during 1997, as compared
to 1996, was primarily a result of a decrease in accounting  and  administrative
expenses  associated  with  operating the  Partnership  and its  Properties.  In
addition,  the decrease in operating  expenses during 1997, as compared to 1996,
was due to the fact that in July 1996,  the  Partnership  sold the  Property  in
Colorado Springs,  Colorado,  as discussed above in "Capital  Resources," and in
connection therewith,  paid approximately $9,000 in 1996 real estate taxes which
were due upon the sale of the  Property.  Because  of the sale,  no real  estate
taxes were recorded in 1997. The decrease in operating  expenses during 1996, as
compared to 1995, was primarily  attributable  to the fact that the  Partnership
accrued  approximately  $46,500  for  current  and past due  real  estate  taxes
relating to the  Properties  in Colorado  Springs and Pueblo,  Colorado,  during
1995.  As described  above,  the amounts  accrued  during 1995 were reversed and
recorded as other income during 1996. No real estate taxes were recorded  during
1996 relating to the Property in Pueblo,  Colorado, due to the fact that the new
tenant is responsible  for the real estate taxes under the terms of the assigned
lease.


      The decrease in operating  expenses  during 1997, as compared to 1996, was
also partially  attributable  to a decrease in  depreciation  expense due to the
sales of the Properties in Hartland,  Michigan and Colorado Springs, Colorado in
1996. The decrease in depreciation  expense was partially offset by the purchase
of the Property in Marietta, Georgia, in October 1996. The decrease in operating
expenses  during 1996,  as compared to 1995,  was  partially  attributable  to a
decrease in  depreciation  expense as a result of the demolition of the Property
in Daytona Beach, Florida, the sale of the Property in Florence, South Carolina,
and the sale of the Property in Jacksonville, Florida, during 1995.

      The decrease in operating  expenses  during 1996, as compared to 1995, was
partially  offset by an  increase  in  accounting  and  administrative  expenses
associated  with operating the Partnership and its Properties and an increase in
insurance  expense as a result of the  General  Partners'  obtaining  contingent
liability and property coverage for the Partnership beginning in May 1995.



      As a result of the sale of the Property in Columbus, Indiana, during 1997,
as described above in "Capital Resources," the Partnership  recognized a loss of
$19,739 for financial reporting purposes,  for the year ended December 31, 1997.
As a result of the sale of the Property in Dunnellon, Florida, as described


                                                        22

<PAGE>




above in "Capital  Resources," the  Partnership  recognized a gain for financial
reporting purposes of $183,701 for the year ended December 31, 1997.

      As a result of the sale of the  Property  in Colorado  Springs,  Colorado,
during  1996,  as  described  above  in  "Capital  Resources,"  the  Partnership
recognized  a gain of $194,839  for  financial  reporting  purposes for the year
ended  December 31,  1996.  As a result of the sale of the Property in Hartland,
Michigan, as described above in "Capital Resources," the Partnership  recognized
a loss for financial  reporting purposes of $235,465 for the year ended December
31, 1996.

      In connection  with the sale of its Property in Florence,  South Carolina,
during  1995,  as  described  above  in  "Capital  Resources,"  the  Partnership
recognized a gain for financial  reporting purposes of $926, $836 and $1,421 for
the years ended December 31, 1997,  1996 and 1995,  respectively.  In accordance
with Statement of Financial  Accounting  Standards No. 66, "Accounting for Sales
of Real Estate," the Partnership  recorded the sale using the installment  sales
method. As such, the gain on sale was deferred and is being recognized as income
proportionately  as payments under the mortgage note are  collected.  Therefore,
the balance of the  deferred  gain of  $126,303  at  December  31, 1997 is being
recognized as income in future  periods as payments are  collected.  For federal
income  tax  purposes,  a gain of  approximately  $97,300  from the sale of this
Property was also deferred during 1995 and is being recognized as payments under
the mortgage note are collected.

      In  addition,  as a result of the sale of the  Property  in  Jacksonville,
Florida,   during  1995,  as  described  above  in  "  Capital  Resources,"  the
Partnership recognized a loss for financial reporting purposes of $6,556 for the
year ended December 31, 1995. In addition,  as a result of the demolition of the
Property  in  Daytona  Beach,  Florida,  the  Partnership  recognized  a loss on
demolition of building for financial reporting purposes of $174,466 for the year
ended December 31, 1995. The Partnership has continued receiving rental payments
on this Property in accordance with the terms of the lease agreement.


      The General  Partners of the  Partnership  are in the process of assessing
and addressing the impact of the year 2000 on its computer package software. The
hardware  and  built-in  software  are  believed  to  be  year  2000  compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the  Partnership  conducts  business  nor its  current or future  results of
operations or financial position.

      The  Partnership's  leases as of December 31, 1997, are triple-net  leases
and contain  provisions that the General  Partners  believe mitigate the adverse
effect of inflation.  Such provisions  include clauses  requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic  increases  in base rent at  specified  times  during  the term of the
lease. Inflation has had a minimal effect on

                                                        23

<PAGE>




income from  operations.  Management  expects that increases in restaurant sales
volumes due to inflation  and real sales growth  should result in an increase in
rental income over time. Continued inflation also may cause capital appreciation
of the Partnership's  Properties.  Inflation and changing prices,  however, also
may have an  adverse  impact on the sales of the  restaurants  and on  potential
capital appreciation of the Properties.



                                                        24

<PAGE>



                                   SIGNATURES



         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 29th day of
July, 1999.


                                      CNL INCOME FUND VII, LTD.

                                      By:      CNL REALTY CORPORATION
                                               General Partner

                                               /s/ Robert A. Bourne
                                               ----------------------------
                                               ROBERT A. BOURNE, President


                                      By:      ROBERT A. BOURNE
                                               General Partner

                                               /s/ Robert A. Bourne
                                               ---------------------------
                                               ROBERT A. BOURNE

                                      By:      JAMES M. SENEFF, JR.
                                               General Partner

                                               /s/ James M. Seneff, Jr.
                                               --------------------------
                                               JAMES M. SENEFF, JR.


<PAGE>


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>

Signature                                 Title                             Date
<S> <C>
/s/ Robert A. Bourne               President, Treasure and Director        July 29, 1999
-------------------------          (Principal Financial and
Robert A. Bourne                   Accounting Officer)

/s/ James M. Seneff, Jr.           Chief Executive Officer and Director    July 29, 1999
---------------------------        (Principal Executive Officer)
James M. Seneff, Jr.



</TABLE>